In the wake of robo-signing scandals involving home foreclosures across the country come the reports of similar behavior by debt buyers who file court actions in order to collect on delinquent unsecured debts such as unpaid credit card debt.

Minnesota Attorney General Lori Swanson recently announced a legal filing against Midland Funding. From the Star Tribune:

Collections giant is accused of “robo-signing” documents

Employees at a giant debt collection company in St. Cloud “robo-signed” thousands of collection documents without verifying their accuracy, allowing false and deceptive lawsuits to be filed across the country against consumers who didn’t owe money, the Minnesota attorney general charged Monday.

The state lawsuit against Midland Funding LLC, one of the nation’s largest debt collection firms, is the first enforcement action in the country against a debt collector for robo-signing, Attorney General Lori Swanson said.

Midland workers admitted signing up to 400 affidavits a day without reading them or verifying whether a debt was owed, according to the lawsuit. Often, the debts were 10 or more years old, known as “zombie debt,” that Midland had purchased for cents on the dollar from credit card companies and other businesses, Swanson said. – Source

Portfolios of delinquent debts are purchased, repackaged and sold, re-re-packaged and resold and re-re-sold some more. This has been an ongoing practice since the savings and loan crisis of the 80’s when investors started to pick up debt assets on the cheap.

The issue with these portfolios has long been the fact that there is often little to no documentation that accompanies the portfolio backing the character of the debts contained in them. They often contain only a line item with limited information about the debt and who allegedly owes it.

From the Tribune article linked above:

Debt buyers receive just one line of data on each debtor, including the name, an address and the amount, Deputy Attorney General Nate Brennaman said. When purchasing debts, Midland and other companies do not purchase underlying charge slips and contracts to prove money is owed, according to the lawsuit.

Question:

How likely is it that a debt buyer purchasing a list of alleged to be owed debt will be able to get any supporting documentation to back up their claim, if they are challenged on their claim, and where the portfolio has been repackaged and resold? Not very. Unless of course you get someone to type up and sign off on an affidavit attesting to facts. Facts where there may be nothing available to support if challenges were ever raised. Otherwise, your left with an attorney for the debt buyer standing in court telling the judge “Your honor, I am willing to pinky swear that my client has a legal right to collect this debt that Miss Smith “dead-beated” on 6 years ago when it was a balance of $2000.00, and where my client paid $60.00 for it, and where my client is now legally entitled to be paid $8000.00”.

Sound screwy? That’s because it is. But that’s how debt buyers roll. They get to do this because they are rarely challenged on the practice. Debt buyers and debt collectors know the vast majority of consumers do not respond to the court summons and they get default judgment on inflated balances that are suspect.

There are not very many attorneys with consumer focused practices around the nation who have the experience to challenge these types of debt buyer law suits. Those that do have the experience have to charge a retainer for their service. Consumers experiencing financial challenges may not have the means to hire an attorney (if they can find one), and sometimes the dollar amount of the suit is low enough to make it a stretch to economically justify the expense of putting up a fight. You also run the risk that the judge involved in your case will just rubber stamp the judgment against you if he or she learns that you at onetime did owe XYZ bank $2000.00 regardless of the lack of supporting evidence to prove it, or the debt buyers ability to prove any accounting that inflated the 2k to 8k.

The above issues with debt buyers having played out over the years, gave rise to more awareness of an inexpensive and administrative method to challenge a debt buyer, or collectors working on behalf of debt buyers, that can be implemented by consumers themselves.

I learned about a consumer’s right to request validation of a debt pursuant section 1692g of the Fair Debt Collection Practices Act (FDCPA) in the early part of the nineties. Debt validation gives you the ability to demand any collector prove that you owe a debt they are trying to collect on. The debt validation request is a very effective tool to make a collector either put up or shut up. Given the right set of circumstances, continuous validation requests could actually allow a consumer to put off paying a debt indefinitely. The debt does not go away per say, but if you can challenge the validity until the debt passes the statute of limitations (SOL) to be sued for the debt in your state, you can then use the same section of the FDCPA to effectively stop a collector from communicating with you through the Cease Communication provision in section 1692c. After the SOL expires for your debt, a collector who calls or writes to you can actually be told to take a hike because you know they cannot sue you in reaction. Well… they can sue, but you would defend the suit as being time barred debt.

Debt validation as a means to put off dealing with a legitimate debt that you may owe became more popular with the internet. There are now too many web sites to count discussing your right to request validation. Only a few of them actually cover the topic well. Most, at least in my opinion, are full of debt validation warriors who have either read up on the topic, or have used the method to put off paying accounts they are not financially able to deal with at the moment and who then propound on its applicability to all things unpaid.

Myths about the effectiveness and applicability of requesting validation of a debt have been held up as a cure all for the unpaid debt that ails you. It’s not. Validation requests should mostly be reserved for use with debt buyers and the collectors they hire, and for good reason.

For anyone trying to navigate their own financial struggles while relying on internet posts from free forums and self proclaimed debt gurus, be careful what you take too literally. For example, requesting validation from your original creditor when they are calling and writing you in their own attempts to resolve the account is a waste of time. Original creditors do not have the same requirements to respond. You may just find your account placed with a local attorney in return for the trouble you went to in sending off the request.

Similarly, if the account has been placed with an agency for collection, but your creditor has not sold the debt, the collector will have easier access to supporting documentation of the debt from their boss, your creditor. Also, once your creditor becomes aware of your validation request (and they will be made aware), they often yank the file and either place it with another agency or worse, with a collection attorney who may also be authorized to file suit. When your original creditor sues you they have access to all of the supporting documentation and won’t need to resort to robo-signing methods used by debt buyers like Midland Funding. While a skilled attorney may be able to successfully defend against an original creditor suit, or stall the final conclusion to the case in order to allow you time to gather resources to settle the account, you still have the economics to consider where you are strapped for money and would have to pay the attorney for their efforts.

Debt validation may go the way of the Dodo

I regularly read articles put out by the collection industry. Yesterday I found a piece commenting on the robo-signing challenges faced by Midland funding and its parent company Encore Capital Group.

From the article:

For years debt collectors and attorneys have gotten by with using a spreadsheet of consumer names, some identifying information, and debt balances as proof of debt owed to contact consumers and to sue them in court. But some new state regulations and court rulings have condemned the practice and a growing number of legal challenges threaten to put an end to it.

Some states are requiring more loan history to file claims, immediate debt verification upon request, or proof of debt ownership to file lawsuits. Some state regulators have filed suit or opened investigations into debt buyers based on documentation issues.

This article does not mention that the FTC recently requested (effectively subpoenaed) documentation from the nation’s largest debt buyers. The FTC is the primary regulator charged with enforcement of the FDCPA and several other consumer protection laws. If they are reviewing the debt purchasing industry it is likely they will not only find things to take exception to, but could make recommendations for legislative and/or rule changes that should impact the debt markets.

More from the article:

The growing wave of regulations and lawsuits may give debt buyers more ammunition to demand account documentation upfront if issuers want to sell the paper.

DBA International, a trade group for debt buying professionals, has actively worked with the American Bankers Association on improving the amount of documentation in debt sales, as is evidenced by the increased amounts of documentation now provided in sales, noted DBA spokesman David Rubinger.

The more supporting documentation becomes a part of purchase portfolios, the more readily validation requests will be answered by the likes of Midland, Cavalry Portfolio Services, Cache LLC, Sherman Aquisitions etc…. With technology advancements, debt buyers should have long ago demanded better documentation of each debt be included in portfolio purchases. They did not, but now lawmakers at state, and probably soon the federal level, will be demanding it for them. This should be welcomed by all of the mid to large sized buyers.

This type of documentation when included in portfolios will lead to the death of the debt validation warrior. I also think it will lead to more lawsuits by buyers against delinquent debtors and that the suits will be filed sooner.

There are some good comments to the article on that site, one of which takes the other side of my opinion that more suits will be filed if documentation is required to be part of a portfolio sale. I see the logic used by the commenter. Perhaps I should have said documentation will lead to more legitimate lawsuits being filed.

It is evident from recent information requests from federal regulators, when combined with the weighing in by many established consumer advocacy groups related to debt collections, that there will be amendments to existing collection laws. While involved in this effort I would hope there is some discussion involving the following:

Stop allowing fees, penalties and interest to accumulate on unsecured consumer debts once the debt is charged off.

In the alternative, not allow any increase to unpaid balances once the account is sold other than attorney fees, legal costs and state capped judgment interest if the courts are used in collection efforts.

Heck, I am on roll, so let’s start to think about the following:

Federal laws that set a maximum SOL on unpaid unsecured debt at 4 or 5 years (states should be allowed to set their own SOL if less than the federal limit).

Fair Credit Reporting Act (FCRA) changes that limit negative trade line reporting to 4 or 5 years from date of last activity in line with the collection SOL.

Chapter 7 bankruptcy credit reporting limitations should be consistent with chapter 13 reporting of 7 years instead of 10. Even better, change chapter 13 and 7 to a 4 or 5 year reporting time line.

The US economy is in need of some major assistance. Allowing bad debts to increase with phantom value that increases the costs of personal financial recovery to already struggling Americans is an insult given the fact that the tax payers stepped up to bail the financial services industry out. The charge off event squares the debt with accounting principles. Why allow the phantom increases?

Consumers affected by the economic downturn will be able to help the nation recover through responsible spending and access to better built loan products that will eventually be more clearly worded and understood starting when the CFPB kicks into gear later this summer. Set the nation up for a successful recovery by allowing middle class Americans the ability to bounce back quicker, just like the banks were given the opportunity to bounce back on the backs of these very same people.

I have been served with a summons for appearing on 01/25/2011 in Pensacola Fl for a debt I had in SC. Now I want to file the answer and affirmative defense portion of it , but is the VOD what I should request from Midland first? Just where do I certify mail the vod request?

Kathrynsc1

I have been served with a summons for appearing on 01/25/2011 in Pensacola Fl for a debt I had in SC. Now I want to file the answer and affirmative defense portion of it , but is the VOD what I should request from Midland first? Just where do I certify mail the vod request?

Anonymous

Mike- What’s your opinion on the “Debt Elimination” company’s stance that since the debt collector was never harmed financially they have no right to collect on a debt they didn’t lend…?

If my friend Mike owes me $1,000 and doesn’t pay me, can I sell the debt for $20 to my friend Bob and then can Bob sue Mike?

Michael

Sean,

If a debt buyer can properly document all that is required of them to prove a claim when held to the standard required in states like NC, Maryland and others, they would likely be successful in more cases than not.

Creditors do not often provide purchasers with enough documentation that allows the buyer to prove the claim. As the account is sold in 2nd and 3rd tertiary bundles it becomes even less likely that the purchaser can meet the higher standard to prove claim.

Debt purchasing is a well established vertical in collection. I am not aware of a case that was successful and provides precedent that a credit issuer cannot sell the right to collect on non performing credit cards.

As far as the Bob and Mike scenario, I am not a lawyer, but if the contract between Sean and Mike established the rights of Sean to sell or transfer rights to the debt and Mike agreed to it at the time of the loan, I suppose Bob could have at it.

Anonymous

Thanks Michael. Recently I have been hearing about law groups claiming to “eliminate” debt by claiming that since the debt collector wasnt harmed, they cant collect. It’s deeper than that & I am not familiar w/ all the ingredients but they claim that the $ loaned was not really from BoA or Chase but from the Fed, then as the credit is lent the debts are are bundled and sold similar to the derivatives in the mortgage industry. Further, they are insured (like mortgages) with junk bonds. Therefore, the original lender is paid back by the bond and no one ever lost $…. So how can they sue.? At least that is what was explained to me. Smoke & mirrors?

Michael

I am pretty familiar with the rabbit trail you are referring to. There is actually some substance to a few of the arguments. There is more support now to some of what was dubbed “fringe” arguments years ago as a result of the financial crisis and what more mainstream commentators have brought to light.

Is it all smoke and mirrors? No. Utilizing the arguments to eliminate credit card debt for regular people on main street is not a good business model though.

Anonymous

Interesting though- If it were held up, No one would technically have to repay a charged off debt…. I can’t believe anyone would let it get there.

Thanks for your thoughts. Seemed a little hokey to me!

Steve Rhode

A NC law that passed a couple of years ago requiring the ability to prove the debt pretty much stopped unsupported suits.

Michael

I learned today of SB 890 in California which contains pretty fair verbiage that will do well in regulating debt buyer behavior in that state. The definition for reasonable verification in the bill:

“A debt buyer shall not make any written statement inan attempt to collect a consumer debt, including bringing suit orinitiating another type of proceeding, unless the debt buyer has inhis or her possession valid documentation that the debt buyer isthe sole owner of the specific debt or account at issue andreasonable verification of the amount of the debt allegedly owedby the debtor. Reasonable verification shall include documentationof the name of the original creditor, the name and address of thedebtor as it appeared on the original creditorâ€™s records, theoriginal creditorâ€™s account number associated with the debt, acopy of the contract or other document evidencing the debtorâ€™sagreement to the debt, and an itemized accounting of the amountclaimed to be owed, including all fees and charges. Upon a requestfrom the debtor to whom the debt purportedly applies, the debtbuyer shall make this information available, without charge, tothe debtor within five business days.”

California residents should contact their representatives and support SB 890.

Michael

I learned today of SB 890 in California which contains pretty fair verbiage that will do well in regulating debt buyer behavior in that state. The definition for reasonable verification in the bill:

“A debt buyer shall not make any written statement in an attempt to collect a consumer debt, including bringing suit or initiating another type of proceeding, unless the debt buyer has in his or her possession valid documentation that the debt buyer is the sole owner of the specific debt or account at issue and reasonable verification of the amount of the debt allegedly owed by the debtor. Reasonable verification shall include documentation of the name of the original creditor, the name and address of the debtor as it appeared on the original creditor’s records, the original creditor’s account number associated with the debt, a copy of the contract or other document evidencing the debtor’s agreement to the debt, and an itemized accounting of the amount claimed to be owed, including all fees and charges. Upon a request from the debtor to whom the debt purportedly applies, the debt buyer shall make this information available, without charge, to the debtor within five business days.”

California residents should contact their representatives and support SB 890.

http://GetOutOfDebt.org Steve Rhode

A NC law that passed a couple of years ago requiring the ability to prove the debt pretty much stopped unsupported suits.

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